Tag Archives: FOMC

26 Apr

Handling movements intra-day and looking ahead to FOMC and BOJ

Good morning,

The indices fell out of bed yesterday morning. The writing was on the wall after the first 10 minutes with a huge reversal in the DAX. It’s one of those things that you simply can’t predict in your morning analysis. You have to be ready for it.

The first chart is sort of a bible to me. I did some statistical analysis of all the closes in the Dow Jones index over the last 30 years. I wanted to know if there was a statistical bias towards a positive close in the Dow. There was, but not by as much as you would have expected. The chart below shows the distribution of positive and negative closes in percentage terms. There are 7400 observations, and 54% of those close in positive territory, while 46% close in negative territory.

What can you take away from this chart? You should accept that no matter how bullish or bearish you are on the market, you should at least accept that anything can happen and the chances of a positive close is only marginally higher than the odds of a negative close.

distribution of closes

Distribution of Dow Jones index closes in %

Today is Tuesday, and we can look forward to an FOMC report Wednesday night. Shortly after we have Bank of Japan with their outlook report. It could be an explosive 24 hours into the weekend. Therefore it is important to be prepared.

economic reports

Let us start with the Dollar Yen. I have annotated the charts in the caption below the chart:

charts 11

Dollar Yen Price Action before and after the 18 December announcement

charts 10

Dollar Yen Price Action before and after the 29 January announcement

charts 9

Dollar Yen Price Action before and after the 15 March announcement

What do I take away from these 3 charts – a very narrow picture of historical price action after a BOJ statement: There tends to be a good follow-on move past the announcement. While I will not be able to predict the direction ahead of the news, I will be able to gauge the news impact after the news and enter the market.

Before BOJ, a few hours before, we have FOMC in the US. I thought I would show you what has happened in the last few FOMC days.

charts 8

Dow Jones before and after the FOMC statement on 16 December 2015

charts 7

Dow Index Price Action before and after the 27 January announcement (huge reversal)

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Dow Index Price Action before and after the 16 March announcement

Do you see a really clear pattern? I don’t. I see one with a big follow-through move into the close, and I see one with a big reversal. That doesn’t mean I won’t trade it, but I will have to consider my strategy on the spot at the time.

Finally, let’s take a look at Euro Dollar, which tends to be brilliant to trade after news announcements:

charts 3

Euro Dollar Price Action before and after the 16 March announcement

charts 5

Euro Dollar Price Action before and after the 16 December announcement

I do this to prepare for what might happen on the day.

Final word: it seems to me that our job as traders is rapidly disappearing.

Bloomberg’s Richard Breslow, former FX trader and fund manager who now comments on markets, has been on a roll lately. One week ago, he officially lost it, going on an epic rant how central banks have devastated “markets” with their constant intervention (proven yet again with today’s report that the BOJ now is a Top 10 owner of 90% of Japanese stocks): “You don’t need to be a Taleb or Mandelbrot to calculate that we have been having once in a hundred year events on a regular basis for the last thirty years” he raged.

Today, his post-weekend anger has crystallized in another aptly titled note, “You Have to Go With the Central Bank Flow”, in which he writes that “for traders, just when they were promised an end was in sight, policy divergences would become tradable and correlations would weaken, the nightmares keep coming.”

The solution: “investors must live with the reality of having to make their living front-running the central banks or be distorted out of existence.”

Well, such is life under central planning: any original thought or fundamental analysis is crushed and the only thing that matters is anticipating what Janet Yellen will have for dinner next. Traders – and the general public – had a chance to restore normalcy when the entire system crashed, by averting bailouts and allowing a reset; now it’s too late.

Here is Richard Breslow on the verge of losing it again:

The whole story here: http://www.zerohedge.com/news/2016-04-25/why-traders-nightmares-just-keep-coming

Tom Hougaard

Tom Hougaard